Chairman Hanger, Chairman Norment, Chairman Jones, Chairman Ware, Speaker Howell, members of the General Assembly: Good morning.
Before we begin, we should have a moment of silence for Lt. H. Jay Cullen, trooper-pilot Berke M.M. Bates, and Heather Heyer who as you know had their lives cut tragically short two Saturdays ago in Charlottesville.
I’m joined today by members of my Cabinet and staff. I thank them for being here today and for their support these past three and half years.
In particular, I want to thank Secretary Brown and his entire team for their commitment to putting the Commonwealth back on solid financial footing. Critical to that effort are: Dan Timberlake, Manju Ganeriwala, David Von Moll, and Craig Burns.
Without their work, and that of the committees before me, it wouldn’t have been possible to realize the potential of our new Virginia economy.
While all of my cabinet has done an outstanding job, I am especially grateful to have had a leader like four-star Admiral John Harvey on our team.
I’d like to extend my heartfelt appreciation to Secretary Harvey for his great service to this Commonwealth as my Secretary of Veterans and Defense Affairs. After nearly 40 years in the U.S. Navy, it seems the only way he could top that was to serve in the McAuliffe Administration!
In all seriousness, Admiral, thank you for your work to transform how we serve and grow our incredible veteran and military community here in Virginia.
Dorothy and I wish you and your family the best as you move on to your exciting new challenge.
Thanks to the targeted investments we’ve made not only for our veterans and active-duty military, but also in education, workforce development, and business and capital recruitment, we’ve been able to create a solid foundation for future economic growth.
We’ve closed 1,012 economic development projects worth a record-breaking $16.4 billion – more than any other administration in Virginia history. Of those projects, 71% reflect expansions of current Virginia businesses.
More than half of those projects were for businesses with fewer than 500 employees.
More than 200,000 jobs have been created since I took office. Initial unemployment claims are at a 44-year low.
And our labor force has expanded for 16 straight months, bringing total employment to 4,320,271 – an all-time high.
This summer unemployment hit a nine-year low of 3.7% – down from 5.4% when I took office – and personal income is up 13.3 percent and hourly wages and salaries have grown 12.2 percent during my term.
In fact, every locality in Virginia has seen a drop in unemployment in that time. I am proud to say many of our rural communities have fallen the fastest – in May, Page County’s unemployment rate was 4.7%, down from 11.6% in January of 2014 – a drop of 6.9%.
In Lancaster the unemployment rate has fallen 5.8%, and in Northampton we’ve seen a 5.2% drop in that time. We have seen a drop of 4.3% in Grayson County (Sen. Carrico); 3.9% in Mecklenberg County (Sen. Ruff), and 3.2% in Patrick County (Del. Poindexter).
But for all the progress we’ve made, we face clear and dangerous threats to our fiscal health. The President’s recent budget proposal will cause irreparable harm to Virginians and the new Virginia economy we’ve worked so hard to build.
And while most of the country and national media are engrossed in the sideshow of ritual firings and late-night tweets, we are facing real impacts down the line that will hurt families from Abingdon to Arlington.
The President’s budget vision for our future includes such “highlights” as cutting or eliminating funding for: the Appalachian Regional Commission, Community Development Block Grants, Low-Income Home Energy Assistance Program, and other assistance for rural economic development and poverty alleviation programs. It would eliminate the Chesapeake Bay Program cleanup efforts and threaten the progress we’ve seen in recent years.
The proposal’s economic growth models are pure science fiction – and they’ve been easily debunked by experts.
The President’s budget imagines an America where people are somehow better off if we gut Medicaid, student loan programs, disability assistance, and the Children’s Health Insurance Program.
And it undercuts Virginia’s workforce development programs by slashing more than $33 million from local training, employment, and education programs.
Let’s just set the record straight right now. This is not a vision for the future. It is a draconian scheme to cut taxes for billionaires by gutting programs that create economic opportunity for Virginia families.
It’s also the single biggest threat to the progress we’ve made and to our ability to regain solid financial footing.
While the proposal does promise increased defense spending, it would take years to realize any positive impacts of that investment. We can’t afford to slash existing economic programs while we wait for new defense spending to kick in.
Now, I’ve been coming here for three and half years to deliver an unvarnished review of Virginia’s fiscal health. Today is no different, but I hope you will share in my cautious optimism while we work together to insulate the commonwealth from the most dangerous of the President’s proposals.
One year ago, I stood before you and announced that fiscal year 2016 general fund revenue collections were $268.9 million below our official forecast.
This required that we reforecast general fund revenues for the 2016-18 biennium, which had just begun. The revised forecast lowered our anticipated collections for the biennium by $1.2 billion from what was originally estimated in the enacted budget.
Needless to say, the situation at that time posed a major challenge to our fiscal well-being. But collectively, we were up to the task.
In October 2016, I announced a budget reduction plan to bring fiscal year 2017 operations back into balance. Later in December, I introduced an amended budget bill to deal with the remainder of the biennium.
While the General Assembly went on to adjust some of the specifics of my budget-balancing plan, we did not let our differences stall progress. We worked together to enact an amended budget that was both timely – as in on time – and balanced.
We passed this balanced budget in the face of a significant revenue shortfall and we did it on schedule without any extensions in the legislative session – something I’d note that 9 other states failed to do this year as of July 1. Our ability to reach pragmatic compromise is what true leadership is all about. More importantly, we worked together to protect our core priorities and to lay a foundation for a new, stronger Virginia economy.
I am proud of the fact that we were able to refocus and tighten up our economic development efforts and incentives so that they will be more effective and accountable. And, we were able to increase funding and improve programs that address mental health.
I am also proud that we restored pay increases for our hard-working state employees, law enforcement personnel at the state and local level, constitutional officers, higher education faculty, and public school teachers.
I think we all know that our dedicated public workforce is on the front line of service delivery to our citizens and as such, they are truly our most important asset.
Our collective response to the fiscal situation at hand was much more than a single budgetary accomplishment.
Rather, our actions strike at the very heart of what it means to be effective public servants. And, that is a far more worthy achievement in my book.
So I applaud each and every one of you and your colleagues for working with me in this effort and for making Virginia a better place to live and work for all of our citizens. On behalf of the people of Virginia, I thank you for your leadership.
In light of our hard work together, it is fitting that I announce today that financial and economic results for fiscal year 2017 all point to success. We were able to attain a surplus in our general fund revenue collections and the Virginia economy continued to expand, with some of our higher-paying job sectors showing solid growth. In fact, according to our July data, we are up 5.4 percent.
For fiscal year 2017, total general fund collections, excluding transfers, exceeded the official forecast by $134.1 million. This was within 0.7 percent of forecast, the smallest forecast error in 10 years. After we factor in end-of-the-year transfers to the general fund from other sources, we ended fiscal year 2017 with an additional $2.5 million, bringing the total to $136.6 million above our budget assumptions for general fund resources. Strong growth in payroll withholding and corporate income tax collections drove the surplus.
This surplus is due to Virginia’s consensus forecasting process – which cultivates thoughtful insight and advice from economists, business leaders, and members of the General Assembly. You’ll be happy to note that this process has a natural conservative slant where adjustments are made to alleviate as much risk to the forecast as possible. I thank the men and women who serve on the Advisory Board of Economists and Council on Revenue Estimates for their great work.
Although many states have not released their fiscal year 2017 results, the media reports from California to Kansas to New York to Massachusetts to New Jersey and even our border states like Kentucky and West Virginia, all point to revenue shortfalls. This only adds to Virginia’s accomplishment when we consider what is happening in so many other states.
Fiscal year 2017 marked the 8th year since the Great Recession. The Virginia economy has enjoyed steady, but restrained, growth during this time. In our attempts to assess the underlying economic conditions of the Commonwealth, we are hampered by the lack of real-time economic data. Often, emerging trends in the world of economics do not become clear, at least data-wise, until such trends are already apparent. Nonetheless, if you look at the data that is available, you will see real improvement.
Solid growth in payroll withholding collections indicates – in real time – a good year for wage growth. In fact, payroll withholding grew an incredible 5.0 percent in the April to June quarter. Last year during that same time, it dropped 0.5 percent. This is critical, as you know, because payroll withholding accounts for approximately two-thirds of our general fund revenues.
Now, I know it’s tempting to spend the extra cash in our state coffers – and I know there are always more needs than resources.
However, I would remind you, that much of that money has already been committed.
For example, the Water Quality Improvement Fund is entitled to 10 percent of any revenue surplus registered at year end.
So, approximately $13.4 million of the fiscal year 2017 surplus will be assigned on our balance sheet for that purpose.
Also, our newly enacted budget calls for at least 50 percent of any revenue surplus obtained in fiscal year 2017 to be placed in a cash reserve to help address any potential negative impacts from a downward turn in the national or state economies, or from future federal budget actions.
This reserve is to be calculated after allowances for any required deposits to the Revenue Stabilization Fund – we estimate none for fiscal year 2017 – and required reserves for the Water Quality Improvement Fund and other balance sheet items. We estimate the provisions of this newly established cash reserve will claim at a minimum $60.4 million of last year’s surplus.
Before I go any further, I think it would be wise to remind everyone why we created this new cash reserve in the budget in the first place. Its enactment was directly tied to the change in the rating outlook which the Commonwealth received from S&P Global Ratings earlier this year.
On April 20, 2017, S&P Global Ratings affirmed our AAA bond rating for the Commonwealth’s outstanding general debt, but they changed our rating outlook from “stable” to “negative.”
They cited two main reasons for this action.
First, it is S&P’s belief that Virginia could face economic headwinds in the future – and I absolutely agree. While they note that Virginia has recovered from the initial implementation of federal sequestration actions, they believe that there is a real risk that future federal spending cuts could have a disproportionate effect on the state’s economy.
This issue is similar to what we went through in 2011 when the Commonwealth received a negative outlook from Moody’s because of potential impacts from federal fiscal policies.
Second, there are concerns with our budgeted withdrawals from the Revenue Stabilization Fund during the current biennium. S&P Global Ratings notes that these budgeted withdrawals are scheduled to occur while the national economy is still expanding.
They are concerned that the withdrawals could leave Virginia with a lower level of reserves, which could weaken our ability to respond to economic and financial downturns in the future.
The key to addressing S&P’s concerns consists of actions on our part to build up reserves to hedge against the future risks associated with the federal government and national economic uncertainty.
S&P Global Ratings even acknowledged that our budgetary action to create an additional cash reserve was a step in the right direction.
Given where we are at, I hope you agree with me that further actions to build up cash reserves and protect our AAA bond rating are paramount among the budget issues we face going forward. I’m glad some of you have already endorsed placing as much of the revenue surplus as possible in reserve.
I want to make clear I will recommend we place every available dime of the revenue surplus into our newly created cash reserve. This will increase the amount of the reserve to $121.5 million rather than the minimum of $60.4 million, which we would otherwise set aside to satisfy the provisions applicable to this reserve currently in the budget.
Given the level of federal and economic uncertainty, I would suggest to each of you that any effort to build up liquidity and cash reserves is a wise course of action. We must remember that, at present, we are less than a month and a half away from the end of the federal fiscal year with no clear idea of what will govern national fiscal policy after October 1, 2017.
A continuing resolution could result in a continuation of sequestration. Unfortunately, all indicators from Washington tell us that we will be operating under a continuing resolution for Federal Fiscal Year 18.
And, we all know how hurtful the automatic federal budget cuts were to Virginia between 2011 and 2013 when military contracts to Virginia firms were cut by $9.8 billion.
If that weren’t bad enough, Congress has very little working time left before the end of September. That is when the U.S. Department of Treasury has indicated that the federal government will reach the national debt ceiling and will no longer be able to pay all of its bills. A default would set off major disruption in the international financial system and impact our ongoing economic progress. I think this is highly unlikely, but it is a possibility that we cannot ignore.
This is a lot to think about, but underscores our need to be very cautious.
Whatever happens on this front could have major impacts on how the Commonwealth approaches budget development for the next biennium.
While much remains uncertain, there are several known factors that we will have to deal with in our upcoming budget deliberations. Both are big-ticket items.
The first is the re-benchmarking of the Standards of Quality for Public Education, which occurs every two years. We have been very mindful of the role that public education plays in benefitting societal and economic development goals and have made it a funding priority in the current budget. The SOQ is also a constitutional requirement. So it will be a high priority to confront the increased cost of this rebasing exercise as we move forward – and it will total hundreds of millions of dollars.
I am optimistic we can find a solution on this issue, given the bipartisan success we have had in securing historic investments in our education system. I’m proud that despite a budget shortfall, we were able to protect K-12 from any significant cuts and we also secured the state’s share of the 2% teacher raise.
The second big-ticket issue is health care, which is also likely to cost us hundreds of millions of dollars.
We reforecast the current Medicaid program and the added costs are funded off the top from projected revenue. But we still have an opportunity to save money and increase health care coverage now that the Affordable Care Act will remain the law of the land indefinitely.
I have called for Virginia to expand Medicaid for three and a half years now. In that time, we have forever forfeited a whopping $10.4 billion of our federal tax dollars.
We have missed an opportunity to cover 400,000 low-income Virginians.
Thirty-one states from across the political spectrum have expanded Medicaid. This isn’t a political issue. These are people’s lives.
I believe in the radical notion that health care shouldn’t be a privilege for the rich. And in the wealthiest nation in the world, one medical event shouldn’t send a family into financial ruin.
Just a few weeks ago, I went to the Remote Area Medical Clinic in Wise for the fourth time as Governor. I want to thank Dr. O’Bannon for providing his services at the clinic.
There, you will see the stark reality of what it means to lack access to affordable health care. People were waiting in the animal pens, separated by bed sheet “curtains” to get the only medical care they’d have this year. Many of them slept overnight in the parking lot just to get a spot in line.
I met a woman who pulled me aside to tell me that the clinic literally saved her life by catching her cancer in time. Another man had been driving for a year without proper eyeglasses. Yet another told me that, at 39 years old, he visited the dentist for the first time ever that day. Sadly, he was too late, and needed all of his teeth pulled.
These folks should get the exact same level of care that you or I do.
That’s why I will be including Medicaid expansion once again in my biennial budget proposal this year.
And even if you don’t believe that the ACA is here for good, let me also remind you that in all of the bills proposed in the House and Senate to repeal the ACA, none of them left the non-expansion states better off. In fact, in one of the proposals, non-expansion states would cover costs for the expansion states for the next five years.
So, I ask you this: Are you willing to let Virginia be block granted or capped at our current Medicaid levels? Are you willing to risk losing out on expansion dollars forever? And are you willing to hamper our state finances by turning away these federal dollars, given the uncertainty we face?
I ask you these questions in earnest, and I hope we can find a workable solution together.
I have formally invited General Assembly leadership to meet with my team to start this process as soon as possible so that, perhaps, consensus can be reached in the budget development process.
I welcome your input and I remind you that I have consistently supported a business-like approach that allows us to bring this money back at no cost to Virginia. If you pursue expansion the way I’ve presented it to you, it could save the state hundreds of millions of dollars.
Further, it could protect us from the potential negative financial impacts of future federal caps on the Medicaid program.
It’s not too late. There’s still more than $2 billion a year on the table that we can benefit from, and I hope we can agree on an approach to do the right thing.
For all of the challenges we will continue to face, I believe we have much to be optimistic about.
Through the ups and downs of these past 43 months – we’ve kept our eye on our goal of building a new Virginia economy every day.
That means creating a business climate that attracts good-paying jobs in 21st century industries, in turn strengthening our state revenues so we can reinvest in programs that prepare our workers for these high-level jobs.
Focusing on that mission is key to lowering our economic dependence on the federal government.
It will also provide stability as we face the highs and lows of our economic cycles.
As Governor, I’ve traveled the globe on a record 30 trade missions attracting new businesses and finding new outlets for Virginians to sell their products and services.
Since we last met, I’m proud to share that we’ve attracted major new companies that will spur growth and increase our financial stability.
In February, I announced that Nestle USA would be relocating its corporate headquarters to Virginia from California, creating many new jobs in the Commonwealth in the process. Luring this global brand was a huge win for Virginia.
And do you know the key reason why Virginia won out over other states that offered much higher incentive packages?
Our world-class public schools.
Make no mistake: if we can’t offer a high standard of living and ensure families can send their kids to quality public schools, access affordable health care, and live in safe communities – we will lose out every time on these opportunities.
Everywhere I go, I hear from businesses that have chosen to locate and expand here because of the investments we make in our people, our public institutions, and our infrastructure.
To keep that competitive advantage, we must remain disciplined in our budget planning without losing sight of the value that comes with consistent investment in public education, transportation, workforce development, and health care.
That is our measure of success. And if we continue to work together, I know we can build bright futures for our children and grandchildren in this great commonwealth.
The New Virginia Economy is the foundation for those futures, and why I have fought so hard to realize this goal.
Chairmen and members of the committees, I thank you for this opportunity to address you today and to serve alongside you during my time as governor. This is truly the greatest privilege of my life.
Governor McAuliffe delivered the year-end report to the General Assembly money committees.